Yemen is fracturing into microstates. Localism is driving politics in the country more than ever before. Unanswered questions about who in Yemen will benefit from the local production of oil in southern Yemen will heavily influence the future of the country, potentially as a failed state where local notables take charge of politics.

Although Yemen’s oil wealth has never compared to that of the rich Gulf Cooperation Council (GCC) states, the impoverished Arabian country’s oil sector has been important to the overall economy. Oil exploration stalled after the civil war in 1994 that threatened Yemen’s unity. Unified Yemen never recovered from the mass exodus of larger international oil corporations. The government had to resort to agreements with smaller to mid-size oil companies. This added an extra layer of complexity into Yemen’s already complex political and geographical terrain, where corporations along with different tribal regions had to negotiate with the central government in Sana‘a. This model was incompatible with the structure of Yemen’s government where power was concentrated in the North.

Unlike other Arabian Peninsula states, Yemen has never had substantial oil and gas production or export capacity. Yemen reached its heyday of production when daily output from its fields peaked at 440,000 barrels per day in the early 2000s and has steeply declined ever since. The maturity of the fields and constant political instability in the country caused production to plummet to 110,000 barrels per day before the civil war erupted in late 2014. Initially discovered and developed by Occidental Canada (now Nexen) and Texas-based Hunt Oil, Yemen’s oil reserves are concentrated in the country’s midlands.

As Yemen does not have any cross-border pipeline infrastructure, tanker shipments serve as the only available export option. The country’s largest oil pipeline has been shut down since it was blown up by the local tribesmen. Meanwhile, the main oil export port of the country, Ras Isa, has been under control of the rebel Houthis since the civil war started. Security of the Aden refinery, Yemen’s largest oil refinery, has been compromised numerous times and it is also non-operational at the moment. Yemen has resumed her export activity since the summer of 2016, when Saudi/Emirati forces retook certain territories from al-Qaeda in the Arabian Peninsula (AQAP) and other non-state actors.

Yemen has been heavily reliant on oil-export revenues since the early 1990s. According to the International Monetary Fund, hydrocarbon reserves constituted almost 90 percent of Yemen’s export revenues. The correlation between global oil prices and Yemen’s internal political situation is a vivid example of how President Ali Abdullah Saleh’s power depended on oil revenues. In 2009, when Yemen’s economy was still reeling from the 2008 economic crisis, Osama bin Laden, whose own ancestral roots traced to Yemen, announced AQAP’s establishment in Yemen. Unsurprisingly, the start of the ongoing multiple-level civil war also coincided with the most recent plummeting of global oil prices in 2014.

North American and European Companies

Retrospectively, 2012 turned out to be the crucial year for Yemen’s energy industry and, consequently, for the unity of the state. That year, Yemeni leadership decided not to extend the Production Sharing Agreements (PSAs) for the development of the two most productive fields in Masila Basin with then-independent Canadian producer Nexen. Nexen, together with Texas-based Hunt Oil, have been at the forefront of Yemen’s oil industry since 1987. Nexen, which was later acquired by Chinese CNOOC in 2013, eventually had to leave the country in 2015 when the oil output from less efficient fields was no longer profitable as the civil unrest escalated into a full-blown military confrontation. The current Canadian-Saudi diplomatic spat is tied to Ottawa’s desire to return to Yemen’s energy market. But Riyadh and Abu Dhabi don’t want to weaken their control over Yemen’s current and future energy market.

French Total and Austrian OMV dominated the Yemeni upstream industry along with Engie, Eni, and Schlumberger before the civil war. Total remained a partner in Yemen’s most lucrative Masila and Shabwa basins. In 2009, the French energy giant also led the consortium that built and operated Yemen’s first and only liquefied natural gas (LNG) project, Yemen LNG, which had to be shut down in 2015 because of the political violence. Total has yet to revamp any of its operations in Yemen while OMV became the first IOC to return to the war-torn country following the Houthis and AQAP’s loss of Hadramaut and Marib at the hands of Saudi and Emirati fighters.

Yet the risky return of the Austrian energy company has already yielded early results which in turn helps to pay a debt to Kuwait Energy, which is still due revenue from Block 5. On July 29, OMV’s first oil cargo left Yemen’s Bir Ali port in Gulf of Aden to East Asia, the usual destination for Yemen’s crude oil exports. The consignment had been pumped from S2 block in the Aqla area in Shabwa.

Chinese Companies in Yemen

Chinese energy giants started showing interest in Yemen’s energy industry in the early 2000s when Chinese companies, supported by their government, embarked on assertive overseas upstream oil and gas investment projects. Amid concerns over meeting the energy demands of its economy, which experienced double-digit growth in those years, the Chinese government encouraged its energy companies to pursue not only important producers such as Iraq but also marginal reserve holders such as Yemen.

Following in the footsteps of the Chinese telecommunications giant Huawei, Sinopec entered the Yemeni oil industry in 2001. Sinopec’s pre-civil-war production in Yemen was around 20,000 barrels. China imported on average around 250,000 tons of Yemeni crude each month before the civil war erupted, which accounted for only one percent of the country’s imports. Only two very large crude carriers have berthed at Yemen’s Ash-Shihr terminal. They have each delivered two million barrels, worth $300 million apiece, to Rizhao in China.

Along with Khartoum and Nairobi, Yemen also plays a strategic role in Beijing’s pivot to sub-Saharan Africa. Since American and European companies are cautious about re-entering politically unstable countries, Chinese companies face little competition when operate in places like Yemen. Chinese companies have also been engaged in power generation and construction projects in Yemen that are ultimately linked to spreading Chinese financial interests across a wide geographical space. Southern Yemen calculates into Beijing’s wider scope of investment strategies by giving China access to yet another key piece of property.

Localism Matters

Yemen’s energy industry is indeed localized now and under the watchful eyes of Saudi Arabia and the UAE. Although Riyadh and Abu Dhabi are attempting to rebuild the south in their own image, local Yemeni notables also benefit from energy exports, including the governors of both Marib and Hadhramawt, and their aides. Based in Marib, Ali Mushin Saleh al-Ahmar has deputized his sons to act as agents to sell Yemeni energy products. In 2014, Ali Mushin even managed push aside Abdrabbuh Mansour Hadi and negotiate energy contracts directly with China.

Currently, this intra-Yemeni struggle over resources extends to the increasingly valuable southern coastline. In July, the Hadi government proposed building a new pipeline that would allow oilfields in the center of the country to export through the southern port of Bir Ali. Known as the Bir Ali Restoration Project, it would rehabilitate a chunk of the existing pipeline from Bir Ali port to Block 4 which the Korea National Oil company handed over to state-run Yicom in 2016. Mushin, backed by the UAE, intervened. Mushin now controls much of the official oil exports from Yemen and controls the main Yemeni oil agents in the south. Consequently, PetroMasila Corporation, under Mushin’s control, provides the main source of income for the government of Yemen. Who ultimately receives any revenues from Bir Ali port is now up to Mushin.

Yemen’s energy industry is still operational—hovering around 44,000 barrels per day—although at levels below actual capacity. Naturally, the multi-tiered civil war in Yemen forced an exodus of foreign companies, which allowed local politicians and notables to pick up the pieces in coordination with their sometimes allies in Riyadh and Abu Dhabi. Given the trajectory of politics in southern Yemen, those who own the energy taps will be the dominant local players in Yemeni politics.

Rauf Mammadov (@RaufNMammadov) is a resident scholar on energy policy at the Middle East Institute (MEI) and a senior fellow at Gulf State Analytics (@GulfStateAnalyt). He focuses on issues of energy security and global energy industry trends, as well as energy relations between the Middle East, Central Asia, and South Caucasus. He has a particular emphasis on the post-Soviet countries of Eurasia. Prior to joining MEI, Mammadov held top administrative positions for the State Oil Company of Azerbaijan Republic (SOCAR) from 2006 until 2016. In 2012, he founded and managed the United States Representative Office of SOCAR in Washington, DC. Theodore Karasik (@TKarasik) is a senior advisor to Gulf State Analytics and an adjunct senior fellow at the Lexington Institute. For the past 30 years, Karasik worked for a number of US agencies examining religious-political issues across the Middle East, North Africa and Eurasia, including the evolution of violent extremism and its financing. He lived in the United Arab Emirates from 2006 until 2016 where he worked on Gulf Cooperation Council (GCC) foreign policy and security issues surrounding cultural awareness, cybersecurity, maritime security, counter-piracy, counterterrorism, and infrastructure and national resilience. GCC relations with Russia and implications for the Arabian Peninsula states were also under Karasik’s mandate.

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